Public Bill Committee

[Mr. Eric Illsley in the Chair]

(Except clauses 1,3,7,8,12,20,21,25,67 and 81 to 84, schedules 1, 18, 22 and 23, and new clauses relating to microgeneration) - Clause 27

Extension of restrictions on allowable capital losses

Mark Hoban: I beg to move amendment No. 31, in clause 27, page 17, line 28, at end insert—
‘(A1) The purpose of this section is that relief for allowable losses shall not be granted where a person deliberately and knowingly enters into complex arrangements intended to avoid liability to capital gains tax, income tax or corporation tax.
(A2) This section shall be construed purposively in line with the principles set out in the statement of principles issued by Her Majesty’s Revenue and Customs on 6 December 2006.’.
I welcome you to the Chair, Mr. Illsley. I also welcome the return of the hon. Member for Wolverhampton, South-West, who was sadly missing on Tuesday. I know of his keen interest in all matters environmental, so he would have enjoyed the debate that we had about zero-carbon homes. Perhaps he has already caught up with it.
The clause introduces a targeted anti-avoidance regime for capital losses, and it might assist the Committee if I make some general remarks about it to give some context to the amendment and the other amendments to the clause. It is fair to say, from conversations and from representations that have been made to members of the Committee by outside bodies, that no one questions the fact that capital losses are being used as part of tax avoidance schemes, so we do not oppose the clause in principle. However, there are issues about its operation to which it is important to draw the Committee’s attention and on which it is important for Ministers to comment.
The clause is relatively short, just a page in length, but its provisions are broad and could capture a large number of fairly standard transactions. Proposednew section 16A(1), “Restrictions on allowable losses”, states:
“For the purposes of this Act, ‘allowable loss’ does not include a loss accruing to a person if—
 (a) it accrues to the person directly or indirectly in consequence of, or otherwise in connection with, any arrangements, and
 (b) the main purpose, or one of the main purposes, of the arrangements is to secure a tax advantage.”
That is broadly drafted and could capture a large number of transactions. One transaction that the Institute of Chartered Accountants believes it could capture is a fairly straightforward tax planning scheme whereby if someone has a significant capital gain on, say, a property, they could decide to realise a loss on shares and that capital loss could be offset against the gain, reducing the tax payable.
Such schemes could be caught by the clause and we know from the guidance notes that accompany it that they will not be. However, the casual reader of the Bill would not appreciate that there are guidance notes underpinning the clause. There is no reference to them in the clause, but there are 10 pages of guidance setting out 14 examples that will help taxpayers steer their way through the breadth of the clause. It is inappropriate for guidance to be used as a substitute for effective primary or secondary legislation.
I shall set out the concerns of the Chartered Institute of Taxation as they were expressed to Her Majesty’s Revenue and Customs. The institute said:
“We are unhappy that our concerns as to the scope of the legislation have been dismissed”.
That is in response to a consultation that took place at the time of the pre-Budget report.

John Healey: Carefully considered.

Mark Hoban: But in the eyes of the CIOT the concerns were none the less dismissed. The CIOT continued that it was also unhappy with
“the assertion that the position can be clarified through guidance. There is no reference in the legislation to either the statement of principle or the guidance and, therefore, no guarantee that the legislation will be interpreted in this context. Furthermore, guidance has no statutory authority and can be changed without consulting Parliament. A taxpayer can only challenge it through judicial review. As such, the enactment of the legislation as it stands represents an unacceptable delegation to HMRC of the power of the legislative.”
Its budget briefing amplified its concern, stating:
“We consider that guidance notes are a poor substitute for proper legislation, especially where the guidance notes correct flaws in the legislation. We appreciate that some guidance notes will always be necessary in order to avoid immense Finance Acts.”
I suppose that some people might appreciate less immense Finance Acts. The briefing goes on to state:
“Such guidance should tie in and complement the legislation, rather than ‘untax’ it.”
Therefore, we have a set of guidance notes that narrows the scope of the legislation as it is drafted. However, would it not be better to have more tightly defined legislation that gives taxpayers greater certainty about what falls within and without the scope of the clause?
In its representations, the Institute of Chartered Accountants states:
“Taxpayers should be taxed on the basis of clear legislation.”
It continues:
“In the absence of a clearance procedure, it is not right to produce deficient legislation that appears to catch many more transactions than intended, on the basis that such transactions can then be taken out by way of HMRC guidance. HMRC guidance has no statutory authority and cannot be taken into consideration in court.”
That is bad enough, but given that guidance notes are so important, it would be helpful if they were clear and reflected some principles. Again, however, the CIOT expresses concern about the clarity of the notes. In one of the examples in the revised guidance notes, the CIOT wrote to HMRC saying that
“we agree that these situations should not be caught by the legislation, but we cannot see that the conclusion that they are not caught is justified from an analysis of the legislation, or indeed, that this view is constantly reflected in some of the later examples in the revised guidance.”
The letter goes on to make the statement:
“The guidance lacks a consistent logic that can be applied to determine when the legislation applies and when it does not. There appears to be an unwritten test, whereby a situation is caught if it crosses the boundary between what is considered by HMRC to be acceptable and unacceptable behaviour. This causes great uncertainty for the taxpayers.”
At a later stage, I will quote from the principles underpinning the guidance to highlight why the CIOT might make such comments about the uncertainty and lack of clarity in the guidance. With that in mind, I have tabled four groups of amendments to increase the protection that is available to taxpayers and to give greater clarity to the Bill. That will give taxpayers and advisers a much clearer idea about the transactions that are caught both inside and outside the scope of those rules.
Amendment No. 31 would insert in clause 27 a new section 16A. It states, in line with the approach adopted by the tax law rewrite project, that there should be an introduction to the new legislation at the start of the clause to set out the purpose and rationale behind the changes. The amendment seeks to set out that purpose in subsection(1) and make explicit reference in subsection(2) to the principles that were set out by the HMRC at the time of the pre-Budget report. 
 We would like all the amendments to be accepted by the Government. I do not know whether the Economic Secretary or the Finance Secretary will reply. The Economic Secretary may be full of generosity in the light of last night’s news and accept all of the amendments with alacrity and without any questioning. It is important to say that all the amendments in the different groups should form part of the package to give much clearer signals to taxpayers.
If Amendment No. 31 is accepted in isolation, it would be contradict the rather sweeping terms of the rest of the clause. It may well be of some assistance to ensure that courts and tribunals interpret legislation purposively, thus limiting the full rigour of the legislation as it currently applies. Amendment No. 31 would narrow the interpretation of the clause to ensure that transactions, in which a loss is deliberately usedto offset a gain—such as in the example I gave earlier—would not be caught, but transactions that include more aggressive tax planning schemes would be. I commend the amendments to the Committee.

Julia Goldsworthy: I will not go over what the hon. Gentleman has just been through, but I do not think that there is any opposition to what the clause tries to achieve, in targeting the anti-avoidance and capital losses. However, there are concerns about exactly how widely drawn the clause is and whether it has sufficiently captured the differences between the approach of companies and individuals, and whether it can reflect those differences.
Furthermore, there are concerns, as the hon. Member for Fareham has said, about exactly how appropriate it is to contain so much detail in the guidance, especially if the guidance contradicts much of the substance of the legislation in trying to exclude specific groups. There are also concerns that, because the guidance is not in the Bill, it can be changed and it would not stand up to the test in a court of law.
I think that amendment No. 31 is trying to establish a motive test, which would be very helpful. My concern is exactly how easy, or impossible, it might be to assess against that motive. So I can see where the hon. Gentleman is trying to go with the amendment; I am sympathetic to what he is trying to achieve. I just have concerns about exactly how the amendment would make a difference, in terms of trying to establish a motive test. On that basis, we broadly support the hon. Gentleman, but we would be interested to hear what the Economic Secretary has to say about this issue.

Brooks Newmark: I am delighted to see that the hon. Member for Wolverhampton, South-West is here. He will know, better than I, that there are all sorts of offences connected to cheating the Revenue, and the boundary between tax avoidance and tax evasion is at least as permeable as the one between tax planning and tax avoiding—I was not, of course, casting any aspersions about the hon. Gentleman.
That being the case, does it not make sense to have some statement from the Economic Secretary relating to intent of the clause? If someone is deliberately and knowingly entering into complex arrangements, it is easier to think them culpable than if they had stumbled into them. After all, as we all know, the complexity of the tax code is at a record high. It might even be said that anyone who interacts with the system at all is entering into “complex arrangements”.

Edward Balls: It is a pleasure to serve under your chairmanship, Mr. Illsley, and I thank you for your guidance. I will try to remain perked up, without my coffee, throughout the debate.
The hon. Member for Fareham has set the debate on this amendment in the wider context of the clause. So that we can deal with each of these four groups of amendments in that context, with your permission, Mr. Illsley, I will respond by also establishing a wider context at the start of the debate on amendment No. 31. In part, that is because I hope that we will then not need to have a clause stand part debate at the end of the discussion on these groups of amendments. I want to explain why we do not think that the amendments are necessary or desirable, but I want to do so in a way that I hope will show that we appreciate the concerns expressed by hon. Members.
 Clause 27 is a targeted anti-avoidance rule, known as a TAAR, to counter tax avoidance schemes that make use of contrived capital losses. It builds on a rule that was introduced last year for companies, by extending that rule to individuals, trustees and personal representatives,  and it is designed to prevent tax losses through avoidance schemes that create or use capital losses in ways unintended by the legislation.
The rule for companies was the subject of similar concerns to those that have been raised this year but, a year on from the introduction of the companies legislation, it is our view that it is working well and as intended. As we work through the amendments, I hope that we can reassure the Committee that the concerns that have prompted these amendments have been addressed and will be addressed by the way in which the legislation will operate.
As hon. Members said, the overall objective of the clause is widely supported. The Institute of Chartered Accountants in England and Wales has said:
“we support the Government’s aim of countering the use of artificially created losses to avoid capital gains tax.”
 Similarly, the Chartered Institute of Taxation, the Law Society and the Society of Trust and Estate Practitioners do not disagree with the broad policy objective. Importantly, there has been extensive consultation on the draft legislation and the guidance with all the representative bodies. Indeed, there have been substantial changes since the consultation on the draft guidance, which began with the pre-Budget report at the end of last year, and HMRC is working with representative bodies to improve the guidance further.
Clause 27 denies tax relief for capital losses where the existence or amount of the losses has been contrived—in other words, where the taxpayer has entered into arrangements of which one of the main purposes is to secure a tax advantage, so that the tax losses that arise do not reflect economic reality. The key principle set out in the statement issued by HMRC on 6 December is that relief for capital losses should be available only where a person has suffered a genuine commercial loss on a real disposal.
The legislation will apply only where one of the main purposes of the arrangements is to secure a tax advantage. It will not apply to genuine economic transactions, so the vast majority of disposals—a wide range of innocent transactions—will be unaffected. We need to draw the rule widely enough to prevent further loss-creation schemes, but as I said, the rule will apply only to arrangements of which one of the main purposes is to gain a tax advantage.
I should tell the hon. Member for Braintree that highly skilled, intelligent people in the City and our wider financial services community come up with quite complex ways of trying to gain a tax advantage. It is not our intention to get in the way of proper tax planning, but when the complexity and ingenuity of schemes moves from tax planning to tax avoidance, the Government must respond to protect the taxpayer.
 Mr. Newmark rose—

Edward Balls: The hon. Gentleman might want to reflect a little more on the reality of tax policy making before he gives us another of his lectures on complexity.

Brooks Newmark: But would not the Economic Secretary acknowledge that the tax system that the Government have created over the past decade has indeed become very complex and that everybody might therefore fall under his definition of entering into complex arrangements as they try to understand it?

Edward Balls: I do not think that the hon. Gentleman was listening to my remarks. Instead, he was just reading out his prepared brief. The point that I was making—[ Interruption. ]

Eric Illsley: Order.

Edward Balls: The point that I was making is that the global corporate tax system has become very complex. Many skilled and ingenious people are coming up with complex ways to avoid tax, and the Government must counter the resulting complexity. The hon. Gentleman might want to reflect a little further on that.
 There are four groups of amendments to the clause. The first—amendment No. 31—would apply additional conditions to the anti-avoidance rule so that it would apply only where a person had deliberately and knowingly entered into complex arrangements that were intended to avoid tax liability. The second group of amendments would introduce a new clearance regime. The third would narrow the scope of the rule by providing thatit would apply only where, taking the arrangements as a whole, someone had the single main purpose of avoiding tax. The final amendment would introduce a de minimis limit. All the amendments would restrict the scope of the clause and, as I will argue, they are not necessary. Indeed, we believe that they would make it harder for us to deal with genuine avoidance and to protect people engaged in proper tax planning.

James Duddridge: Perhaps the Economic Secretary will explain in a bit more detail what will happen if an individual makes a large capital gain and owns shares on which there is a loss, which they decide to sell at some point in the year in which they made the capital gain, to reduce their overall taxation. Where would that situation fit under current legislation?

Edward Balls: I shall deal with that example in a moment, after I have dealt with amendment No. 31.
 The clause already contains a main purpose test, which means that the rule disallows losses only when the person has entered into arrangements with the main purpose of securing a tax advantage. The amendment provides that, in addition to having that main purpose, the person must have entered into complex arrangements deliberately and knowingly, with the intention of avoiding liability to tax. The only effect of the amendment would be to limit the effectiveness of the rule.
 The types of schemes that are caught by the clause do not happen by accident; they are the result of contrived circumstances in which transactions are undertaken in a particular way, primarily to achieve a desired tax effect, rather than for a genuine commercial or economic purpose. The danger of adding extra conditions such as “deliberately and knowingly” is that a person who wishes to avoid tax may claim to have acted unintentionally or to have followed advice without being aware of the consequences. Similarly, introducing the condition that the anti-avoidance rule can apply only where the arrangements into which the person has entered are complex can lead only to uncertainty for taxpayers and agents. More fundamentally, if the arrangements have a main purpose of avoiding tax, it is entirely right that they should be caught by the rule, regardless of their complexity.
 The addition to the clause’s comprehensive, familiar definition of tax advantage of the uncertain words “intended to avoid liability” would lead to confusion and the creation of a loophole in the rule, and would add to the complexity that we always seek to avoid. It is essential that we use the definition of tax advantage that is used in the long-standing rules against avoidance of tax on income, which has regular and common currency, and which was recently reintroduced without opposition in the Income Tax Act 2007. That definition was also used without opposition in the Finance Act 2006, in the rules against avoidance by companies using capital losses.
The meaning of “tax advantage” is set out in the clause; it is based on existing anti-avoidance rules. The effect of modifying that well-understood wording by introducing avoidance of liability as a condition of the application of the TAAR would be that schemes that generate a repayment of tax, rather than a reduction in tax liability, would not be stopped. Such a loophole could be exploited by existing tax avoidance schemes that have been seen by HMRC.
The amendment also proposes to include a new statement that the clause is to be
“construed purposively in line with the statement ofprinciples issued by Her Majesty’s Revenue and Customs on6 December 2006”,
which is unnecessary, particularly as all legislation is now interpreted purposively. As I have said, the TAAR arrangements do not affect normal tax planning. HMRC guidance makes it clear that the rules of the TAAR will affect only contrived arrangements that attempt artificially to realise capital losses to gain a tax advantage. Normal tax planning, such as the decision to sell shares before the gain becomes greater than the annual exempt amount so that no tax will paid on the gain, is not affected by the clause.
 Although much tax avoidance involves complex arrangements, it is quite possible to make non-complex tax-avoiding arrangements. The key question is whether the main purpose of the arrangements is to avoid tax. If so, it is right to disallow the losses. In response to the hon. Member for Rochford and Southend, East, if the pursuit of normal tax planning—his example was the selling of shares—means that no tax is paid, that will be acceptable. If, however, the main purpose is to avoid taxation, and the arrangements are contrived, the arrangements in the Bill will apply.
In summary, amendment No. 31 would hinder the clause. The amendment is unnecessary, it would not provide additional certainty for taxpayers, and we fear that it would introduce new loopholes and complexity to the tax system. However, I can reassure Committee members that consultations have been detailed and that they are ongoing. I hope that the industry will take reassurance from the example of the introduction of such methods for companies and capital losses one year ago, and recognise that if they are implemented properly, we can avoid the concerns that hon. Members have raised.

Rob Marris: It is a pleasure to be back from Lithuania, and I note that, despite my absence, on Tuesday evening the Committee sat until 7.30 pm. Clearly, the extended sittings are nothing to do with my presence or absence.
I should like a little latitude on amendment No. 31, because it must be put in context. I am a member of the Law Society of England and Wales, and in its brief it says that while supporting the principle behind the legislation—namely, to deny the use of artificial or contrived capital losses—the Law Society, together with the Chartered Institute of Taxation, the Society of Trust and Estate Practitioners and the Institute of Chartered Accountants in England and Wales tax faculty, have expressed significant concerns that the drafting of proposed new section 16A does not meet this policy objective.
The Chartered Institute of Taxation says in paragraph 9.3 of its brief that the guidance notes need to be clarified since the examples conflict with each other and, for the reasons outlined in the paper, it also considers that the legislation is flawed. As it set out in its previous paper, it thinks that some of the examples in the guidance should be corrected.
I ask my hon. Friend to look again at the guidance. He addressed some of the issues in his previous remarks, but when such august and knowledgeable bodies say, “We like the idea, but we are not sure that you have got it right in the legislation and/or the guidance,” it behoves the Treasury to look again, in particular at the guidance, to ensure that it is not contradictory, that it embodies examples that do not conflict, and that it embodies that which the Government seek to do.
 Certainly, Labour Members wish to prevent tax avoidance by the rich, which is what the provision is about when we get down to it. There is nothing wrong with being well-to-do, but I notice that most Conservative amendments thus far have been about capital gains and capital losses. The vast majority of my constituents—albeit in a middle-class constituency—do not juggle capital gains and losses all the time. It is important to some people, but not to the vast majority of people.
In terms of the purposeful or purposive—whatever adjective my hon. Friend used—interpretation that is put on legislation, amendment No. 31 is worth considering, but I am not convinced by its wording, particularly by the adjective “complex”, which as he pointed out is somewhat vague. However, the targeted anti-avoidance rule for capital losses uses similar wording, so it appears in one measure, but not in the Bill. I urge my hon. Friend to reconsider the Bill to ensure that we do not have contradictory methods.

Mark Hoban: We have had a brief but useful debate, and I welcome many of the remarks that the Economic Secretary made, particularly those about the consultation being ongoing. It is important that when the guidance notes are finalised, they give clear, logical and consistent guidance to practitioners and advisers about what falls within and without the scope of the clause. The Economic Secretary’s own remarks indicated the need for clarity.
 My hon. Friend the Member for Rochford and Southend, East used the example of someone who deliberately realises a loss on shares that they hold to offset a gain on another asset. That could be seen as being contrived, because they have triggered a loss to offset a gain, but the guidance notes say that such a transaction is part of normal tax planning and is acceptable. That is part of the problem with the clause. How does one define what is within and without it? The guidance notes are important in helping one to do that, but I would be much happier if clause 27 were much more tightly worded and we will discuss detailed amendments on that point. The Economic Secretary used the words “contrived” and “economic loss”, but they do not feature in the Bill, which makes it more difficult for people to understand the scope of the measures.
On the comments of the hon. Member for Falmouth and Camborne, I agree that the amendment is not perfect. That is why I said that it should be seen in the context of other amendments that we will discuss later. It would be better if the amendments were agreed as a package rather than accepted by the Government on a piecemeal basis. However, there is no indication that the Economic Secretary will accept any of our amendments.
 The hon. Member for Wolverhampton, South-West recognised some of the comments made by professional bodies about the scope of the clause. I agree with him that many of the provisions are targeted at those who can afford expensive tax planning schemes, but many people who have modest gains or losses may well wonder whether they are caught by the measures. Perhaps that is one reason why an amendment that we will discuss later seeks to introduce a de minimis rule: to separate people with relatively small losses from those with large losses.
I do not propose to press the amendment to a Division. I am reassured by the Economic Secretary’s remarks about the ongoing consultation, and I know that he will live up to his commitment. I look forward to receiving some sense from various institutes that the process is going well and that it will achieve the desired outcome for the Revenue, taxpayers and their advisers.

Edward Balls: I would like briefly to reassure my hon. Friend the Member for Wolverhampton, South-West and Opposition Members. Since the pre-Budget report, there has been consultation on the draft guidance, and extended guidance was published on Budget day. Consultation on the guidance is ongoing and, after the Bill is enacted, we will publish final guidance that will reflect the results of the consultation, the views expressed by representative bodies and our debates. We want to provide clarity and reassurance on the record where we can.
 I will give two examples to clarify our intentions and to further reassure Opposition Members. A straightforward example of a loss that would not be affected by this measure is a simple arm’s length sale of FTSE 100 shares that have genuinely gone down in value. The fact that someone who realises such a loss might be able to set it off against gains that he or she has made on other investments in the year would not mean that the loss would be disallowed by this measure. Similarly, if a husband transfers to his wife, on a no-profit, no-loss basis, shares that are standing at a loss, it is perfectly acceptable for her to sell those shares and set the loss against a gain that she intends to realise on some other asset. Those are examples of normal tax planning that would not be captured by the measures.
In the real world of tax policy making and, with respect to the hon. Member for Braintree, in the real world of business, the best way to provide clarity is not always to make legislation more complex or restrictive. Indeed, adding such complexity can undermine the best efforts of both sides to find a sensible way forward. That is why consultation on guidance, rather than restriction and legislation, can often be a better was to proceed in tax policy making. I urge him to reflect on that point a little further.

Mark Hoban: I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mark Hoban: I beg to move amendment No. 34, in clause 27, page 17, line 29, at beginning insert ‘Subject to section 16B below,’.

Eric Illsley: With this it will be convenientto discuss the following amendments: No. 36, in clause 27, page 17, line 34, at end insert ‘; and
(c) the arrangements, taken as a whole, are not genuine commercial arrangements.’.
No. 35, in clause 27, page 18, line 12, at end insert—
‘16B Clearance procedure
(1) Section 16A shall not affect the operation of section 135 or 136 in any case where, before the issue is made, the Board have, on the application of either company mentioned in section 137(1), notified the Company that the Board are satisfied that the exchange, reconstruction or amalgamation will be effected for bona fide commercial reasons and will not formpart of any such scheme or arrangements as are mentioned in section 137(1).
(2) Any application under subsection (1) above shall be in writing and shall contain particulars of the operations that are to be effected; and the Board may, within 30 days of the receipt of the application or of any further particulars previously required under this subsection, by notice require the applicant to furnish further particulars for the purpose of enabling the Board to make their decision; and if any such notice is not complied with within 30 days or such longer period as the Board may allow, the Board need not proceed further on the application.
(3) The Board shall notify their decision to the applicant within 30 days of receiving the application or, if they give a notice under subsection (2) above, within 30 days of the notice being complied with.
(4) If the Board notify the applicant that they are not satisfied as mentioned in subsection (1) above or do not notify their decision to the applicant within the time required by subsection (3) above, the applicant may within 30 days of the notification or of that time require the Board to transmit the application, together with any notice given and further particulars furnished under subsection (2) above, to the Special Commissioners; and in that event any notification by the Special Commissioners shall have effect for the purposes of subsection (1) above as if it were a notification by the Board.
(5) If any particulars furnished under this section do not fully and accurately disclose all facts and considerations material for the decision of the Board or the Special Commissioners, any resulting notification that the Board or Commissioners are satisfied as mentioned in subsection (1) above shall be void.’.

Mark Hoban: I want to deal with amendments Nos. 34 and 35 together. The main thrust of amendment No. 35 is to introduce a clearance procedure into the clause. Given the breadth of the clause, such a procedure would give taxpayers greater confidence; they would be able to have some certainty about the treatment of a particular transaction to ensure that it is not being caught under the clause.
The Economic Secretary referred to this as a targeted anti-avoidance rule during his remarks on the previous group of amendments. Some might argue that it is not particularly targeted and that it is more akin to a general anti-avoidance rule—GAAR. Often when such rules have been introduced in other jurisdictions, the necessary corollary of introducing a GAAR is establishing effective clearance procedures, allowing taxpayers the opportunity to establish with certainty whether or not arrangements are caught. That allows them to assess their own tax position correctly.
The Economic Secretary might argue that the guidance notes will give the taxpayer sufficient information to enable them to determine the right course of action. The final version to be published once the Bill is enacted might well give the degree of clarity that means that they do not need a clearance procedure. However, I shall cite the CIOT’s response to example 10 in the revised guidance published at the time of the Budget in order to give a flavour of where the uncertainty lies. The response states:
“The conclusion that the transaction is not being caught does not appear consistent with the explanation of where the legislation applies, given in paragraphs 7 to 14 of the revised guidance...We would stress that we agree with the conclusion reached in example 10 of the revised guidance that loss should be allowable as a matter of principle...but on the basis of the actual legislation suggest it is not and that the revised guidance is unclear, as the explanatory paragraphs do not lead one to the conclusion set down in example 10.”
Example 10 happens to relate to where shares are sold to fund investment in an enterprise investment scheme when there is an income tax relief to be gained from such investment.
The fact that the CIOT can see why a transaction should not be caught but that it is not clear from the guidance indicates the need for a clearance procedure. In its representations, the Institute of Chartered Accountants in England and Wales said:
“In the absence of a clearance procedure, it is not right to produce deficient legislation that appears to catch many more transactions than intended, on the basis that such transactions can then be taken out by way of HMRC guidance.”
I think that HMRC and the Treasury recognise the complexity, which is why the Government have partly conceded the point by introducing a post-transaction clearance procedure for trustees in the final year of settlement. In a way, by producing that clearance procedure, they have conceded part of the argument that these rules are complex and that trustees might find it difficult to navigate their way through them. Does that procedure apply to the tax year 2006-07?
On amendment No. 36, the statement of principle and the guidelines indicate that the legislation is not intended to apply to genuine commercial transactions. The amendment seeks to ensure that that objective is met in the Bill. The revised guidance states:
“This legislation will not apply where there is a genuine commercial transaction that gives rise to a real...loss as a result of a real commercial disposal. In these circumstances there will be no arrangements with a...purpose of securing a tax advantage.”
I suppose that, in a way, that argument underpins the Economic Secretary’s response to the example quoted in the previous debate about shares being sold to offset a gain on another disposal, and that there must be an actual economic loss from a genuine commercial transaction.
 Amendment No. 36 would ensure that taxpayers could see an important principle in the Bill rather than having to rely on guidance notes, which, as I said in the earlier debate, have no status in a court of law.

Julia Goldsworthy: Again, I shall not repeat the hon. Gentleman’s remarks, but I want to emphasise that this is perceived to be more of a mini general anti-avoidance rule rather than a targeted ruling, precisely because it sets out broad definitions and then seeks in the guidance to exclude certain transactions. If it were targeted, one would imagine that it would be the other way round and that the Bill would state who the intended target is to be.
The hon. Gentleman raised the fact that there is a post-transaction clearance system for trustees, but I have received representations from organisations such as the Institute of Chartered Accountants, which, because it sees it as a mini general anti-avoidance rule, is keen to have a pre-clearance system as a way of establishing certainty about whether it falls into the circumstances outlined in the clause.
 Following on from the Economic Secretary’s remarks about amendment No. 31, I, too, was reassured by what he said about the guidance. The problem is that we will not have an opportunity in this place to see the impact that the consultation discussions will have had, so we will end up with guidance without having had the opportunity of discussing how far it addresses our concerns. Those concerns about trying to set out the exclusions in the guidance rather than trying to define tightly who is targeted in the Bill remain. I sympathise with many of the concerns that this group of amendments raises.

Edward Balls: Before explaining why we do not propose to accept the amendments, may I say that the representative bodies’ detailed input into the consultation and into briefing Committee members, and the substantive and detailed way in which this debate is being conducted are very helpful? I appreciate that because it gives us the opportunity to respond to some of the concerns on the record.
There is a balance to be struck between clarity in primary legislation and flexibility to respond in a timely way to the concerns of the industry and practitioners. We must strike the right balance between making our objective clear in legislation and allowing the guidance to operate outside the detail of primary legislation. We are trying to get that balance right. I am happy to ensure that all hon. Members are sent a copy of the final guidance so that they can reflect on it. We are not in any way seeking to prevent that debate in Committee, but we need to be flexible in the operation of the tax system.
 In response to the hon. Lady, I point out that the operation on the company’s side of this approach has been successful so far. We are not attempting to introduce a general anti-avoidance measure. It is targeted on contrived avoidance, which is very much the context of these discussions.
Amendments Nos. 34 and 35, tabled by the hon. Member for Fareham, seek to introduce a clearance procedure. The Government fear that that would lead to greater compliance cost and bureaucracy, but that it would do little to protect the majority of taxpayers, who in any case will not be affected by clause 27. The amendments are unnecessary because the clause contains a main purpose test, which means that it will apply only when a person has entered into arrangements that have the main purpose of securing a tax advantage, which is to say tax avoidance. Such schemes do not happen by accident. They are the result of contrived circumstances in which transactions are undertaken or carried out primarily to achieve a desired tax effect, as opposed to a genuine economic purpose, as the hon. Gentleman acknowledged.
The equivalent rule for companies, which was introduced last year, does not have a clearance procedure. HMRC has had no indication that companies are unsure about the operation of the rule. As I explained, the consultation is ongoing. Indeed, having consulted HMRC officials, the Government will be able to produce the final, detailed guidance before Report. Remaining concerns about the measure can be raised then. The consultations are yet more advanced than I anticipated in my earlier remarks.
The clearance system is intended primarily to benefit taxpayers, but it is important to bear in mind that the rule operates by reference to the main purpose of arrangements. That main purpose may be inferred from the actions of the parties to the arrangements, but it is best understood by the person making the arrangements. It is therefore not necessary to set up a clearance regime when the person best placed to judge whether the rule applies is the person who makes a clearance application.
Furthermore, it is likely that taxpayers and their advisers would end up using a formal clearance procedure when it was clear that there was no need to do so. Lawyers and accountants would be concerned that their professional indemnity insurance would be at risk if they failed to use an available statutory clearance procedure. It is highly likely that they would make applications for clearance in all cases in which they were advising on transactions that might result in capital losses, even when it was clear that there was no tax avoidance purpose and despite clear HMRC guidance. The only effect of the measure would be that thousands of wasteful applications for clearance would be made, all of which would increase costs to the taxpayer, administrative burdens for HMRC and complexity. There could be delays and inflexibility, which is not what anybody intends.
If, however, taxpayers are unsure how to interpret the wording of the new rule, they may, under the code of practice 10 procedure, approach HMRC. The experience of the equivalent law for companies suggests that there will be little need for the measure suggested in the amendment. The HMRC guidanceis intended to provide the clarity and certainty thatwe seek.
The hon. Member for Fareham raised the issue of the clearance procedure for trusts. The procedure will simply extend an existing informal procedure that gives certainty to trustees to enable them to wind up a trust and to distribute its assets to beneficiaries. That is HMRC’s way of ensuring that no further inquiries will be made into the trust’s tax affairs unless there is evidence that reforms are incomplete or incorrect. In answer to his question, I reassure him that those arrangements will apply in 2006-07.
The hon. Gentleman also raised the question of the guidance being concessionary. The guidance is not concessionary, as alleged by the CIOT. It explains things in a way that is easier for someone who is not a lawyer to understand that the targeted anti-avoidance rule will only affect losses arising from arrangements whose main purpose is to secure a tax advantage. The Government accept that there is scope to improve the guidance. We will be working with the CIOT and other bodies to improve the guidance before Report.
 Amendment No. 36 would add to the main purpose test the requirement that the rule can only apply only when the arrangements taken as a whole are not genuine commercial transactions. The Government believe that such a measure would limit the effectiveness of the anti-avoidance rule. The risk is that even though particular steps in a series of arrangements might be objectionable and artificial, the persons involved could point to an overall commercial objective for the arrangements, and seek to escape the application of the rule. As I have said, the new rule would apply only when one of the main purposes of the arrangements was to secure tax advantage, and would not apply to genuine economic transactions. If the main purpose of arrangements is to avoid tax, it is right that they should be caught, regardless of whether the arrangements as a whole also achieve some other commercial end. Amendment No. 36 would undermine that principle.

Mark Hoban: I thank the Economic Secretary for his full response to amendments Nos. 34 and 36. As to his remarks about the clarity of the guidance, it is only when the final guidance is published that we shall know how clear it is and whether in that context a clearance procedure is needed. I shall, on the next group of amendments, quote from the revised guidance from the time of the Budget, suggesting the lack of current clarity on the issue of the main purpose.
The Economic Secretary said that the guidance is not concessionary. This may not be the appropriate forum, but I should quite like him, given the comments of the CIOT, to explain why the CIOT and HMRC have very different views on the status of guidance. Guidance is an issue that has cropped up before in these debates. Last year, we debated the withdrawal of cash lump sums from pension funds; the clause was broad and people were untaxed as a consequence of guidance. It would be helpful to understand why he and professional bodies differ in their opinion of the status of the guidance.
I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mark Hoban: I beg to move amendment No. 30, in clause 27, page 17, line 33, leave out ‘, or one of the main purposes,’.

Eric Illsley: With this it will be convenientto discuss the following amendments: No. 29, in clause 27, page 17, line 34, after ‘arrangements’, insert ‘taken as a whole’.
No. 27, in clause 27, page 17, line 34, leave out ‘secure a tax advantage’ and insert
‘avoid a liability to capital gains tax, corporation tax or income tax’.
No. 32, in clause 27, page 17, line 34, at end insert ‘; and
(c) the arrangements are not prescribed arrangements.’.
No. 26, in clause 27, page 17, line 38, leave out from ‘enforceable),’ to end of line 7 on page 18.
No. 33, in clause 27, page 17, line 38, leave out ‘and’ and insert—
‘ “prescribed” means set out in regulations made by the Commissioners for Her Majesty’s Revenue and Customs.’.
No. 28, in clause 27, page 18, line 11, leave out ‘tax advantage is secured for’ and insert
‘avoidance of liability to taxation relates to’.

Mark Hoban: I suspect that the Economic Secretary will, in this debate, pray in aid the arguments that he has used previously—that the guidance will be clarified. However, it is worth highlighting some areas of concern.
 A quotation from the guidance may suggest the possible lack of clarity for taxpayers in assessing the main purpose. The Economic Secretary said in his remarks on the previous group of amendments that the person conducting a transaction should know its purpose, and that the guidance should help. Paragraph 12 of the guidance states that
“the existence of a tax advantage, such as obtaining a deduction for tax purposes, is not enough in itself to show that the arrangements have a main purpose of obtaining a tax advantage.”
Paragraph 13 gives three different examples, suggesting the complexity of the issue:
“For instance, where there is evidence that a person considered two ways to achieve a commercial objective and chose on commercial grounds to pursue one of them, the fact that there was a beneficial difference in tax treatment for the chosen route would not meet the main purpose test”.
I think that that is very clear. It goes on:
“Where the potential tax treatment was a factor in choosing between alternative arrangements, then it would still be necessary that securing a tax advantage was a main purpose to the arrangements. There may be situations where the tax advantage secured through undertaking one arrangement rather than another is so significant that this indicates that achieving a tax advantage was a main purpose. This is unlikely to be the case where the arrangements chosen do not involve additional, complex or costly steps included solely to secure or enhance a tax advantage.”
 As the Economic Secretary suggested in discussing earlier amendments, there could be very simple schemes that would give rise to tax advantage, so the use of the word “complex” is perhaps not helpful in the context. It shows a grey area when taxpayers would have to make judgment in the absence of clearance procedure about whether their transactions falls into that category and what weight should be given in their thought processes to the amount of tax advantage to be gained from choosing to structure one or another route. I am not sure that such a decision is straightforward.
The third example is the polar opposite of the first example and concerns a person who has entered a marketed tax avoidance scheme. That would be taken as an indicator that securing a tax advantage was the main purpose of the arrangements. I can understand that and see exactly where the main purpose test was satisfied. I can see why it was not satisfied in the first example when the tax difference happens to be a by-product of the choice of structuring. However, it is when the tax difference starts to become more significant that the grey area appears and the fact that arrangements might be complex does not necessarily mean that there is an issue. There are some simple tax avoidance schemes.

Rob Marris: The hon. Gentleman referred twice to complex versus simple tax avoidance schemes. Why did he not include the word “complex” in amendment No. 31?

Mark Hoban: One of the benefits of our proceedings is the learning process. Matters are scrutinised and we listen carefully to the Economic Secretary who puts forward some eloquent arguments.

John Healey: He always does.

Mark Hoban: The Financial Secretary says that the Economic Secretary always does. I am not sure that that is always the case, and he knows that. Some tax avoidance arrangements could be simple, but why in paragraph 13 was “complex” used, given that it was a good argument for not accepting my amendment.
 Rob Marris rose—

Mark Hoban: However, I shall not go into the realms of consistency and inconsistency although the hon. Member for Wolverhampton, South-West might be about to do so.

Rob Marris: The hon. Gentleman seems to be strongly implying to the Committee that he was convinced by what was said about simplicity and complexity, but he seems to be reading from a script that was typed prior to this sitting.

Mark Hoban: Actually, I am reading from the HMRC guidance that was published on 21 March, so by necessity it was typed before today’s sitting. I am surprised that the hon. Gentleman does not have a copy of it.
I have dealt with the complexity of the issue and I am sure that the revised guidance will shine new and fresh light on the matter. Perhaps there will be a new paragraph 13. It might be being typed as we speak and reflect more carefully on how we distinguish between complexity and simplicity. There is a spectrum of arrangements from a relatively straight forward tax planning matter, which we established earlier was acceptable, to the marketed tax schemes, which are not. If we are putting the onus on taxpayers to work their way through the guidance note, as the Economic Secretary suggested, it is important that the spectrum has more clarity.
Amendment No. 30 would remove the phrase
“or one of the main purposes”.
That reflects part of the problem in paragraph 13. It may be difficult for someone to determine how significant a tax benefit might be in moving something from a subsidiary to a main purpose. It would restrict the scope of clause 27, as the Economic Secretary said all the amendments would do, but I hope that it would give greater clarity so that when a tax benefit flows from a structured route, unless it is really the driving force, it should not be counted as one of the main purposes.
Amendment No. 29 would insert the phrase
“taken as a whole”.
 It would ensure that the HMRC would need to look at the transaction scheme as a whole rather than individual elements. As the legislation stands, if the purpose of any single transaction in the overall arrangements is to gain a tax advantage, the legislation applies, even if the arrangements as a whole have a genuine commercial purpose and give rise to real disposals. Under the amendment, HMRC would have to demonstrate that the purpose of the arrangements as a whole was to secure a tax advantage.
Amendments Nos. 32 and 33 would introduce safe-harbour provisions to give the commission of the HMRC the power to set out prescribed—not proscribed—arrangements. Doing so would highlight areas in which the use of statutory relief is straightforward and would make it clear that the use of such relief does not bring the relevant arrangements within the scope of the clause. HMRC’s guidance gives examples of the types of relief that would not be affected, and the Minister referred to no-gain, no-loss transactions between spouses or civil partners under section 58 of the Taxation of Chargeable Gains Act 1992. The amendments would therefore give taxpayers much greater certainty.
Let me quote the CIOT on this issue. It says:
“We agree that these situations should not be caught by the legislation, but we cannot see that the conclusion that they are not caught is justified from an analysis of the legislation, or indeed, that this view is consistently reflected in some of the later examples in the revised guidance.”
Again, that suggests that setting out prescribed arrangements would help to provide the clarity that is perhaps lacking in the guidance as currently drafted, but which might be in a later clause.
The CIOT raised the issue at the Finance Bill open day, and it is fair to say that it recognises some of the issues that arise from safe-harbour provisions. It has said:
“We appreciate that, at the...Open Day, it was indicated that it would be difficult for safe harbours to be drawn up in a fair way, and that they could be used by serious avoiders to ‘leap from one safe haven to another’. However, we do consider that, because the legislation is so widely drawn, and especially if no de minimis threshold is set, consideration should be given to instituting some safe harbours, to cover very ordinary transactions not intended to be caught by the proposals.”
In a way, the proposals are an alternative to the clearance procedure that the Minister rejected under a previous group of amendments—they are a different way of achieving the same goal.
Amendments Nos. 26, 27 and 28 would replace the wide definition of tax advantage with the words
“avoid a liability to”
taxation. Again, the amendments should be seen in the context of the subjectivity that I highlighted in relation to paragraphs 12 and 13 of the revised guidance, where the relationship between different routes for a transaction and each one’s tax benefits becomes more difficult. The amendments would help to focus the clause on decisions that were deliberately made to avoid tax, such as marketed tax avoidance schemes, rather than call into question the legitimate structuring of transactions to minimise tax.

Brooks Newmark: I have several points to make. On amendments Nos. 27 and 28, I am nervous that the guidance notes start talking about a kind of abstracted, average investor who makes investment decisions without proper regard to tax advantages. In my book, that is a bad investor. All investors look for tax advantages, but the majority do not do seek illegitimate means to avoid paying tax. There is a fundamental difference.
It would be easy to make the case that there are tax advantages, for example, to having children—with five children, I plead guilty as charged. However, it would be somewhat more difficult to suggest that saving tax was a good justification for having children. It would not even be the main the reason—in my case, the TV might have gone on the blink. [Laughter.]

Eric Illsley: Order.

Brooks Newmark: There is now a tax advantage to be had by building an eco-home, but I doubt that the Economic Secretary is suggesting that that constitutes avoidance. If he were, it would be a quick clampdown even by his standards. Let us use the word avoidance, which is not in itself particularly clear or helpful, but does at least have a fine provenance.
 On amendment No. 30, I am uneasy about the use of the term “main purpose” in any context concerning tax avoidance, because it reeks of over-simplification to say that any single commercial decision has a main purpose except perhaps that of making money. However, the clause does at least refer to “the” main purpose rather than “a” main purpose, which crops up in Budget note 30 and in HMRC guidance. I do not wish to be pedantic, but the presence of the definite article seems to imply that there must be a single overarching purpose and intention to avoid tax. Unfortunately, proposed new section 16A(1)(b) immediately spoils the effect by introducing the possibility of other, competing main purposes.
The amendment would clear up some of that confusion by making it clear that there is but one main purpose. It has the ring of a creed to it. I am concerned that as it stands, the clause sows the seeds for a test case about how much a taxpayer needs to be motivated by nefarious intent for his or her actions to qualify as a main purpose. If there were just one main purpose it would still be a difficult call to make, but if there are many possible main purposes I think that the determination will become almost impossible.
If there are three main purposes for undertaking a transaction, which has priority? Will we end up with an absurd litigation calculus in which it is necessary to ascribe an arbitrary value to each, with HMRC officers arguing the toss between the intention to avoid tax and other, legitimate, commercial purposes? It would be far simpler to do away with the idea of different main purposes and give the words their common meaning—that a main purpose is the one that eclipses all others instead of competing with them.
 To go a little wider, there are further problems with the whole business of a main purpose forming the basis of a test for behaviour. If I understand paragraph 12 of the HMRC guidance correctly, making use of a statutory relief is not sufficient to demonstrate a main purpose and fall foul of the clause. Apparently, something stronger is needed—that the intention to avoid tax is so significant that it must be the main purpose. That is somewhat self-referential. Saying that something is a main purpose merely by dint of its being really significant does not help us much. It is also not particularly robust, because all the decisions involve value judgments being made about individual cases by individual officers. The determination of whether something is “main”, “genuine” or “straightforward”—all words that appear in the clause or the notes, is essentially a matter of personal choice and will lead to inconsistencies in outcome with even the best of guidance.
There is something a little strange about the Revenue’s insistence in paragraph 8 of its guidance that the definition of “arrangements” is
“in general a question of fact.”
It is not, and even that short statement contains a caveat. Determining the interface between legitimate tax planning and avoidance is a matter of judgment and discretion, which is why the Taxes Management Act 1970 originally gave the Revenue a discretionary power to grant extra-statutory concessions in difficult and unforeseen situations.
There needs to be more recognition in the Bill that none of those judgments are cut and dried. The question of “main purpose” needs a simple answer: a purpose that is so overwhelming that no rational person could doubt that it was the motivation behind a transaction. It does not need to be the only purpose, just the predominant one. Amendment No. 30 would simply introduce a little more clarity, and I hope that the Economic Secretary will support it.
On Amendments Nos. 32 and 33, the criticism that the clause has received from the Institute of Chartered Accountants in England and Wales is focused on one principle: that the clause is not as focused as it should be. The ICAEW goes as far as to say that it amounts to a general anti-avoidance rule instead of a targeted one, and that the reliance on external guidance instead of a tight focus sows the seeds of confusion. It does not help that so much of the language surrounding anti-avoidance legislation is morally loaded and open to interpretative whimsy.
The Revenue has accepted that its officers and, almost as an afterthought, the general public and their professional advisers need some form of guidance, but the status of that guidance seems to be equivocal, at least as far as the professional advisers are concerned. In its submission to the Committee, the Chartered Institute of Taxation cited its 2005 paper, “Taxed by Law, Untaxed by Concession”. I confess that I have not read the paper, but its title makes for a good little aphorism that the Economic Secretary could frame and put on his wall. It is drawn from a judgment in the late 1970s which aimed to address the law of unintended consequences where the commissioners of the Revenue wished to depart from the letter of the law to prevent a perceived inequity. It also confronts, pithily, the culture of extra-statutory concessions, which the Revenue relies on as a fiddle to get around awkward situations. Perhaps the Economic Secretary will confirm the current status of extra-statutory concessions.
The House of Lords seems to have thrown the cat among the pigeons by deciding in the Wilkinson case of 2005 that extra-statutory concessions could not run counter to explicit parliamentary intention or deal with a matter that Parliament could easily have addressed but did not. The ICAEW is of the opinion that the guidance provided by HMRC has the effect of narrowing the scope of the clause as presently drafted to the point that it changes the intention of clause and, therefore, interferes with the intention of Parliament. It contains undertakings that the clause will not be used in certain situations where it would be inequitable for it to be applied and, as such, is verging on being an extra-statutory concession.
A very helpful summary of the Wilkinson case appeared in The Independent—not that I read that paper very often.

Eric Illsley: The telly was on the blink.

Brooks Newmark: The telly was not working andno comic books were available, so I read The Independent—The Guardian was not available either. It noted that the judgment said that the regime of extra-statutory concessions gave the Revenue the
“discretion to formulate policy in the interstices of the tax legislation”.
I am sure that that is derived from the Latin. [Interruption.] It is legalese, and I am not a lawyer. Perhaps the hon. Member for Wolverhampton, South-West can tell me what it means. The article continued:
“dealing pragmatically with minor or transitory anomalies, cases of hardship at the margins or cases in which a statutory rule is difficult to formulate or its enactment would take up a disproportionate amount of Parliamentary time.”
We are in the middle of taking up a disproportionate amount of parliamentary time—I include myself in that, so I shall quickly come to the end of my remarks—but we are in the fortunate position of being able to confront the issue head on.
Removing nebulous guidance and replacing it with regulations that set out what is a prescribed arrangement for the purposes of the clause would be one way of bringing certainty into this area. More importantly, taxpayers could rely on them before the courts.
The HMRC website contains a glossary which defines an extra-statutory concession as applicable
“when strict application of the law would create a disadvantage, or the effect would not be the one intended.”
However, it would be easier for the Minister to be clear now about the effect that is intended by ensuring that the clause is less widely drawn.
All anti-avoidance measures are
“at the interstices of the tax legislation”
precisely because the boundary between legitimate tax planning and outright avoidance is difficult to pin down, but I question whether it is good enough to deal with that boundary with the even murkier solution of non-statutory guidance, which cannot be relied on by taxpayers or their advisers to hold true over time. Even if the Revenue has good intentions, the Minister must admit that different officers will be capable of construing even the clearest guidance in different ways. Such differences of opinion will cause difficulties for taxpayers, who will not then have an easy remedy against the Revenue.
 I hope that the Minister will support the amendments or allow some redrafting so that Parliament’s clear intention has a statutory footing and is not left lurking in departmental guidance.

Philip Dunne: I will make a relatively brief contribution in support of the amendments, which were well set out by my hon. Friend the Member for Fareham.
It is important to provide some definition in the tax code, rather than leaving discretion for all capital transactions when losses occur in the hands of HMRC, which will allow it to rule in each individual case on whether a contrivance for capital losses was involved.
The focus is on the definition of “arrangements”, which includes, as I understand it, any
“agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable).”
That effectively means that any transaction in which a capital loss occurs can be construed by the Revenue as an arrangement. Although the Economic Secretary, when introducing the clause, indicated that it is not the Government’s intention to capture every transaction in which a capital loss occurs, it allows the Revenue to make that interpretation should it so wish. It is not good enough to leave it to the Revenue’s discretion and in guidance notes. It must be properly defined in the Bill.
Clause 27 relates to the new definition of tax advantage, which could be another unfortunate extension of the Revenue’s powers to imply some kind of nefarious activity by individuals who seek quite properly, as the Economic Secretary conceded in his introductory remarks, to take advantage of, for example, annual exemptions for capital gain. It seems entirely appropriate to revert to language that is well understood in tax law, on avoidance of individual aspects of losses instead of the new concept of tax advantage, which could set an unfortunate precedent.

Edward Balls: The seven amendments would limit the scope of the targeted anti-avoidance rule in three different ways, and I shall take them in three groups.
 Amendments Nos. 30 and 29 would alter clause 27so that the anti-avoidance rule would apply onlywhen a person has entered arrangements with thesingle main purpose of securing a tax advantage. Amendment No. 29 would alter the clause by adding conditions so that the rule would apply only when the arrangements, taken as a whole, have the main purpose of securing a tax advantage. Altering the clause’s main purpose test so that the rule applies only if there is a single main purpose would limit the effectiveness of this anti-avoidance rule. The type of schemes that are caught by the clause do not happen by accident, but are, as I explained to hon. Members, especially the hon. Member for Ludlow, the result of contrived circumstances in which transactions are undertaken or carried out in a particular way primarily to achieve a desired tax effect rather than for a genuine commercial or economic purpose.
If the arrangements have a main purpose of avoiding tax, it is right that they should be caught by the rule, regardless of whether the avoidance of tax is their only main purpose. If amendment No. 29 were accepted, there would be considerable scope for debate about whether a particular set of arrangements had a main purpose of avoiding tax, even if the taxpayer had clearly entered into highly artificial tax avoidance schemes. We do not want to introduce that sort of ambiguity into primary legislation.
Adding to the clause’s main purpose test the requirement that the rule can apply only when the arrangements are taken as a whole risks weakening the rule. There is a risk that even if particular steps in a series of arrangements are objectionable and artificial, the persons involved could point to an overall commercial objective and therefore side-step the rule. That would even allow people to add avoidance schemes to normal commercial transactions safe in the knowledge that, as tax avoidance is not the main purpose of the arrangements, when taken as a whole, they could side-step the targeted anti-avoidance rule.

Adam Afriyie: Is the Economic Secretary suggesting that there could be no overall commercial objective to a series of transactions, each of which might, in its own right, appear to be an avoidance scheme, but the overall scheme achieves a commercial objective?

Edward Balls: No, of course not.
 Amendments Nos. 27, 26 and 28 would replace a familiar definition of what constitutes a tax advantage with a less specific reference to avoiding liability. The definition of a tax advantage has not been plucked out of thin air. It is, in all essentials, the same as the definition used in the long-standing rules against avoidance of tax on income, and was reintroduced recently, without opposition, in the Income Tax Act 2007. The definition was also used, again without opposition, in the Finance Act 2006 rules against avoidance by companies using capital losses. In contrast, there is no certain or generally agreed understanding of what constitutes avoidance of liability to tax.
 A second reason for rejecting the amendments is that they would create a loophole in the rule. Changing the reference to securing a tax advantage to one of avoiding a liability to tax would mean that some highly artificial schemes that generate a repayment of tax rather than a reduction in tax liability would not be stopped. Avoiding a liability to tax is a more limited concept than securing a tax advantage. It is undesirable to introduce such a loophole. To make that change would mean running the risk of limiting effectiveness and allowing potential avoidance schemes to move ahead.
Finally, amendments Nos. 32 and 33 together seek to alter the clause to exclude from the anti-avoidance rule arrangements prescribed arrangements, which are defined as arrangements
“set out in regulations made by the Commissioners for Her Majesty’s Revenue and Customs.”
It is not clear exactly what those regulations are expected to cover, as clause 27 will apply only when one of the main purposes of arrangements is to secure a tax advantage. It will not apply to genuine transactions or when a taxpayer simply makes use of statutory relief.
If the purpose behind the amendments is to ensure that such simple actions are outside the scope of the rule, it is unnecessary, because that is made explicit in the guidance. Adding in regulations a list of safe transactions that are not caught by the rule could have one of two negative effects. First, it could permit people who are attempting to avoid tax to get around the rule by using an acceptable transaction as one stage in a longer series of transactions. Secondly, it would be of no practical benefit to compliant taxpayers because it would have to be hedged round with conditions to the effect that the transactions would be prescribed transactions only if they were not part of a longer series of transactions that were intended to avoid tax.
Paragraph 13 of HMRC guidance stresses that all the circumstances of a case have to be taken in the round when deciding what is the main purpose of arrangements. There will be a small minority of cases in which the main purpose is unclear, but the guidance will provide as much clarity as possible.
The hon. Member for Braintree said that the guidance was an afterthought. I did not understand that point, because it was published with the pre-Budget report before the Bill. I have never heard of a pre-emptive afterthought before. He also tried to introduce greater complexity into tax legislation.

It being twenty-five minutes past Ten o’clock, The Chairman adjourned the Committee without Question put, according to the Standing Order.

Adjourned till this day at One o’clock.